Monthly Archives: June 2018

Richard Marin Scrushy was born 1952 in Selma, Alabama. He is a convicted felon and an American businessman. He is the founder of a global healthcare company HealthSouth Corporation, based in Birmingham, Alabama. Do we all remember that time when Richard Scrushy’s attorneys filed their much-anticipated challenge to Section 906 of the Sarbanes-Oxley Act of 2002? For Corp Law Blog’s carefully managed build-up to this great event, see “Scrushy to SOX: ‘You’re Illegal!'” and “Scrushy to SOX: ‘Parts of You May or May Not Be Illegal, I’m Not Sure Yet’.”

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What does Section 906 address? It is about criminal penalties regarding certifying a misleading or fraudulent financial report. These penalties can be upwards of 5 million American dollars in fines and up to twenty years in prison.

The pages of Corp Law Blog are filled with Scrushy’s exploits. Who can resist a guy who turns a Big 4 auditing firm into certified toilet auditors, who hires big brother Wayne from “The Wonder Years” as a corporate executive, who refuses to leave his company’s board while fighting criminal and civil actions and who oversees the worst special litigation committee ever?

This time he’s serious. And I’m taking him seriously.

Scrushy’s motion to dismiss the Section 906 counts (PDF) carefully dissects Section 906, revealing the many flaws of the statute I’ve previously observed must have been “drafted on the back of a used cocktail napkin.”

Consider the following points made by Scrushy’s lawyers:

SOX makes it a crime not to file a 906 certification, even if the CEO or CFO is unable to determine whether or not the certification is true. This puts the CEO and CFO in a “damned if you do and damned if you don’t” situation.

Section 906 is too vague — terms like “fairly present” and “in all material respects” are too subjective to serve as the basis for criminal liability.

A lot depends on the word “willful,” a word of many meanings none of which are specified in Section 906. An officer whose certification is knowing faces up to $1 million in fines and 10 years behind bars, while an officer whose certification is knowing and willful faces up to $5 million in fines and 20 years behind bars.

Section 906 was drafted in “careless haste” by a Congress that doesn’t, to this day, understand it.

I’m no con law or crim law expert, but I think he’s onto something.

All this reminds me of a penetrating and prescient analysis of Section 906’s perniciousness penned by Sy Lorne only a month after Sarbanes-Oxley passed. So, a former general counsel of the SEC and a former colleague of mine identified three concerns with Section 906’s “extraordinary legislative mandate” that echo throughout Scrushy’s motion:

First, it is not clear who has liability, if anyone, for a failure to observe the obligation.

Written in the passive voice, the statute . . . merely provides that “[e]ach periodic report containing financial statements . . . shall be accompanied by a written statement . . .” to the effect that the report complies with the requirements and contains information that “fairly presents . . . the financial condition and results” of the issuer. Although Section 3(b)(1) of Sarbanes-Oxley provides generally that there are criminal penalties for violations of the statute, it is not clear whether it is the issuer or the executives who are susceptible to being charged.

The second concern a former general counsel of the SEC and a former colleague of mine, identified is:

Due to its curious wording, the only clear basis for “violating” the statutory requirement (which, as a criminal statute, presumably will be strictly construed) is to submit a certificate in a form that does not comply with the statutory requirement. There is no clear provision in the statute that the certificate must be correct, or that one would violate the law by submitting a certificate that, although containing the requisite language, is false. . . .

The third or – what does “right” mean here?

Third, the Section 906 requirement suggests the lack of Congressional (and popular) appreciation for the endless judgments that are necessarily a part of accounting. The popular view is that the numbers should be “right.” But what does “right” mean? A country club has acres of land in the middle of town that were bought a hundred years ago for 10 thousand American dollars and remain on the books at that value. Accounting convention generally forbids writing it up. Is that number right? Do those financial statements “fairly present” the financial position of the club in some abstract sense? Clearly not.

From “Sarbanes-Oxley: The Pernicious Beginnings of Usurpation?” from the Wall Street Lawyer (footnote citations omitted). For more, see “A Challenge to Sarbox Constitutionality” (CFO.com) and Scrushy’s press release announcing the move. Thanks to Broc Romanek for locating the motion and linking to it in his essential blog.

Once upon a time, the federal securities laws had the parochial goal of ensuring that companies provided investors with information material to investment decisions. These days those laws are spreading their wings to accommodate all sorts of goals. Earlier this year, Congress directed the SEC to require companies to disclose their ties to rogue states. Last month, New York Congressmen Anthony Weiner and Steve Israel introduced the Publish What You Pay Act of 2004, a bill that would require issuers to disclose in SEC reports payments made to foreign governments for the extraction of natural resources.

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And what is it written in such bill you ask me?

The Securities and Exchange Commission shall revise its rules and regulations . . . to require each [reporting] issuer to disclose in the annual and quarterly reports of such issuer the aggregate payments by such issuer made in connection with the securing of exploration, development, exploitation, extraction, and production rights for natural resources to any foreign government or any other public entity of a foreign country. Such aggregate payments shall include taxes, royalties, fees, and other amounts paid in such connection.

Protection from the world

The Congressmen’s joint press release reports that these disclosures will protect U.S. companies and consumers from corrupt foreign governments:

“The added sunshine on these deals will level the playing field, and allow corporations to make reasoned judgments about the costs and returns associated with contracting with a particular foreign government,” said Rep. Weiner. “Corrupt regimes will be less able to shake down one corporation and move on to another because everyone will know what’s going on. Just as important, investors will know that their dollars are being spent wisely.”

Israel added, “With the release of today’s report, Americans find that the record high prices they’re paying at the pump are being spent to prop up dictators and pay off corrupt regimes. This legislation requires full disclosure so that we can finally open the books to consumers, investors and government officials and slam the door on corruption and human rights abuse.”

The oversight that is too large to not correct

Nothing in the law would require private companies, or foreign companies not obligated to report in the U.S., from making unreasoned judgments when contracting with corrupt foreign governments. I suppose that oversight could be fixed during the rulemaking process.

Update on the story

An alert reader points out that the Investor Network on Climate Risk is trying to get the SEC to require issuers to discuss global warming risks in their SEC reports. See “Thirteen Pension Leaders Call on SEC Chairman to Require Global Warming Risks in Corporate Disclosure” from the INCR website. The Cardin-Lugar provision in the Dodd-Frank Act was passed into law in 2010 so the companies had to start publishing the pieces of information regarding on what they pay in the countries in which they operate. In May 2016 launched a collaborative space focused on using extractive sector payment transparency data.

In “What Weblogs Can Do For You” (Illinois Bar Journal), Evan Schaeffer takes some shots at Corp Law Blog:

Mike O’Sullivan’s Corp Law Blog is as well written as any legal magazine. [faint praise, indeed] The blog’s focus is suggested by its title; O’Sullivan covers “issues encountered by corporate lawyers.” But he does it with style and verve [he left out “pizzazz” and “flash”], regularly making topics like Sarbanes-Oxley almost fun to read about [“almost” fun means not quite fun which means the opposite of fun which means boring — we get the message, Evan, loud and clear].

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Evan obviously thought he could pick on a dormant blog, one that wouldn’t have the will to respond. Evan, you thought wrong. Corp Law Blog is back with a vengeance and promises to pump out even longer and boring Sarbanes-Oxley posts and whiny attacks on Eliot Spitzer and ill-informed explications of Microsoft’s option exchange program and obscure diatribes against unused clause identifiers and ill-used amongst and between.

You wondered what a weblog could do FOR you?

Pretty soon you’ll learn what a weblog can do TO you! You might think I’m overreacting, that Schaeffer is just a tough critic. How, then would you explain the way he gushes like a lovesick teenager when he describes ProfessorBainbridge.com as “an always-entertaining blog,” Stay of Execution as “always witty and entertaining,” Benefitsblog as “original [and] timely” and My Shingle as “free”? In fairness, Evan did manage to hit the bulls-eye when he warned potential readers of Howard Bashman’s How Appealing blog that “you’ll have trouble” with that blog. Nothing but trouble.

What now?

It is very important that you choose the right place where you are taking your information in the sense that they are true and that they benefit you. It’s not important to read popular blogs, those that everyone is going read, but to find the source of information that will be interesting to you, and also those who will reveal things you know in a new way as well as things you do not know in a comprehensible way. So read carefully, do not miss anything, but choose who you are relying on.

Where do you get your information? That is quite important. You don’t want to be wrong or poorly informed. You need to stay in the “now”, to know what is happening in the world of law. But also, you need to know your history. You cant call yourself as someone who is well informed if you don’t know what came before you and laws you know today. So pick carefully from who you are taking your information. And let us start because I am going to bring you some of the best sites where you can find just what you may need.

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A few months ago I penned a paean to the SEC’s website (see “A Random Walk Through the SEC’s Website”), gushing that it was the most “essential corporate law source of them all.” At the time, I figured I’d soon be pounding out tributes to my other favorite corp law sites. Instead, I got really busy with work. Instead of writing about these other sites, I found myself using them in my work more than ever before. Many of them on a daily basis.

So, to the point

Below I’ve listed the eight sites I used the most in my work over the last few months. This list doesn’t include all my favorite sites, just those I found myself returning to day after day over the last few months to help with work-related issues.

10kWizard.

EDGAR is the world’s best precedent library for corporate lawyers. In order to use all the features of this library, you need a premium EDGAR retrieval service that gives you flexible search, display and downloading options. I’ve used 10kWizard since it was free. Even now that it’s not free, I appreciate that its fee structure permits unlimited searches for a fixed annual fee. That permits me to surf EDGAR in a mildly focused way, unconcerned that my aimless searches are racking up huge client charges. Instead of printing out or downloading SEC reports, I often just call them up on 10kWizard when I want to review them. I’m sure other premium EDGAR services offer these features and more — many of my colleagues swear by the feature-rich LivEDGAR — but I’m used to 10kWizard and unwilling at this point to try anything else.

TheCorporateCounsel.net.

When I was a pup, the cumulative index to the bound editions of The Corporate Counsel was my main source for locating practical securities law commentary. Whenever I had a securities law question, after checking the law and the relevant SEC telephone interpretations, I would stroll to the library, peruse The Corporate Counsel’s cumulative index, and usually end up finding two or three articles on point. Today those binders filled with yellowed newsletters are all online in a fully searchable database at TheCoporateCounsel.net. While that database is, in my view, reason enough to obtain an online subscription, you can also find law firm memos organized by topic, special pages devoted to topics like Regulation G and Rule 402 Cashless Exercises, and many other features only a corporate lawyer could love.

TheCorporateCounsel.net Blog (aka Broc’s Blog).

Years ago Broc Romanek started the first corporate law blog at RR Donnelly’s RealCorporateLawyer.com. When Broc moved over to The Corporate Counsel, he brought his blog with him. While I enjoy reading many blogs, none are more useful to me in my day-to-day practice than Broc’s. Broc has his finger on the pulse of corporate law departments and corporate lawyers, often anticipating issues before the rest of us have thought of them. Best of all, Broc’s blog is free, so you can read it every day (like I do) even if you don’t subscribe to The Corporate Counsel.

DealBook.

The New York Times’s DealBook is the best business blog. It’s not listed on my sidebar because it’s not a website. Instead, it’s delivered the old-fashioned way — by email. Every business day DealBook serves up blurbs from and links to 30 to 40 business-related stories from the New York Times and, importantly, many other newspapers, magazines, and other publications. Some subscription-only publications make selected content freely available to DealBook readers. In times like these, when I don’t have enough time to read my favorite business publications, DealBook provides me with a quick injection of business news without any fuss. DealBook is free to those who register with the New York Times’s online edition.

FindLaw.

Convenience. That’s why I so often find myself navigating to Findlaw when I could instead be flipping through a codebook. Sometimes I’m on a call and want to call up a provision I thought I knew by heart. Other times I want to send a snippet from a code to someone and find it easiest to just copy and paste it from Findlaw into an email. Still other times I run across a statutory reference and wonder what it is. And that’s just when I’m looking for codes and rules. Findlaw is still the largest repository for, and directory to, free case law. I don’t think it’s any secret that this is one of the best free legal resources on the web.

Google.

It’s unbelievable how much legal information I get off Google these days.

RealCorporateLawyer.com.

RR Donnelly’s contribution to the corporate lawyer’s cornucopia of websites has several features that keep me coming back. Its home page is a model of clarity, displaying headlines under four categories (SEC Daily Briefs, SEC & Other Regulatory Developments, Breaking News, and Special Features). Donnelly’s staff does a good job keeping the headlines up to date each day. The site’s “What’s New on the SEC’s Website?” feature tells you-you guessed it — what’s new on the SEC’s website each day. A real timesaver for habitual SEC website surfers like me. I’ve long felt that Wachtell Lipton’s client memos are the best in the field — timely, succinct and opinionated. If you do not have the good fortune to be on Wachtell Lipton’s mailing list, you can usually find their latest offerings in RealCorporateLawyer.com’s Special Features section, which links to recent law firm memos.

Securities Lawyer’s Deskbook.

The University of Cincinnati cranks out such a good compendium of securities laws, the SEC doesn’t even try to compete. I probably have more printed sources for federal securities laws and rules than anything else, yet I find myself clicking through to the Securities Lawyer’s Deskbook all the time. I appreciate the clean redesign, the word search feature, the quick navigation, the focus on just the laws and rules I work with the most. It’s really a nice service. And best of all, it’s available wherever you have a computer and an internet connection, allowing you to leave those bulky Appeal and CCH binders back at the office.

These are a few of my favorite corp law-related websites. Do you have other favorite corp law sites? If so, please let me know and I’ll consider them for future Essential Sources postings. Just drop me a line at corplawblog at yahoo dot com.

The Sarbanes-Oxley Act of 2002 protects whistleblowers by providing both civil remedies (Section 806) and criminal penalties (Section 1107) against those who retaliate against them. It was passed by U.S. Congress on July 30, 2002. The Act was created in response to accounting malpractice in the early 2000s.

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Sarbanes-Oxley Law was created on the initiative of two US Congressmen Paul Sarbanes and Michael Oxley, after a well-known series of corporate scandals such as Enron and WorldCom. The Sarbanes-Oxley laws have become mandatory for everyone companies whose shares are listed on any stock exchange in the US, and their purpose is to introduce them effective internal control system for the financial reporting process.

SOX gives the Department of Labor first crack at handling complaints brought under Section 806 by whistleblowers who believe they are the victims of unfair retaliation. Last month the Occupational Safety & Health Administration (OSHA) of the Department of Labor announced the publication of its interim final rules for handling these whistleblower complaints.

So, what happened?

As discussed in “Blowing the Sarbanes-Oxley Whistle,” an article by Ashlea Ebeling posted yesterday on Forbes.com, employers may be surprised by the rapid responses required under OSHA’s interim final rules. Employers and any other persons named in a whistleblower’s complaint will initially have only 20 days to respond to a whistleblower’s complaint before OSHA decides whether to begin an investigation.

If OSHA’s investigation suggests that the claim has merit, OSHA will give the employer and other named persons another 10 days to try to present clear and convincing evidence that the claim is without merit. If OSHA nevertheless determines that the claim has merit, the employer and other persons named in the complaint would then have another 30 days to file any objections and request a hearing in front of an administrative law judge. Translation: a lot of work must be done very quickly in order to head off these whistleblower complaints.

And there is more…

What makes this pressure cooker even more daunting is that Section 806 of SOX permits these whistleblower complaints to name not just the employer, but also any “officer, employee, contractor, subcontractor or agent” of the employer, each of whom may be held individually liable to the whistleblower. If you are concerned that this high-pressure high stakes system may encourage whistleblowers to file frivolous claims or otherwise act in bad faith, you may take some solace from OSHA’s ability to award “a reasonable attorney’s fee, not exceeding1 thousand American dollars to employers and other victims of whistleblower complaints held to be frivolous or filed in bad faith. Then again, unless you know a skilled labor lawyer who bills at 5 American dollars per hour, you probably won’t.